Financial and Managerial Accounting The Cornerstones of Business Decisions International Edition 2nd Edition by Jay Rich . Dan Heitger - Test Bank

Financial and Managerial Accounting The Cornerstones of Business Decisions International Edition 2nd Edition by Jay Rich . Dan Heitger – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Sales and Receivables

 

TRUE/FALSE

 

1. Selling on credit protects a company from the risk that some of its receivables will never be collected.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

2. Accounts receivable are shown on the balance sheet at their net realizable value.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

3. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

4. A primary advantage of the allowance method to account for bad debts is that it supports the matching principle.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

5. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

6. The account, “Allowance for Doubtful Accounts” is an expense account (the cost of making bad credit sales) that is reported on the income statement.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

7. Because the allowance method results in better matching, accounting standards require its use rather than the direct write-off method, unless bad debts are immaterial.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

8. The longer a customer’s account balance remains outstanding, the greater the likelihood that it will be collected in the near future.

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

9. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

10. The higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash (through sales).

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   5-8

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

11. The lender (issuer) of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

12. The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

13. If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the amount of the sale in a case of nonpayment from a cardholder.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

14. The terms “realized” and “realizable” mean that the selling price is fixed and determinable and collectibility is reasonably assured.

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   5-1

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

15. Net Sales = Total credit sales – Sales Discounts – Sales Returns and Allowances

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   5-2

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

16. Trade receivables represent a stronger legal claim against the debtor than do non-trade receivables.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   5-3

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

17. The amount of interest paid is a function of three variables, the amount borrowed, the interest rate, and the length of the loan period.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

18. If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry for bad debts.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

19. A balance sheet approach to estimating bad debt expense is not permitted under GAAP (Generally Accepted Accounting Principles).

 

ANS:  F                    PTS:   1                    DIF:    Challenging    OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

20. A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all present.

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   5-7

NAT:  AICPA FN-Measurement | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

COMPLETION

 

1. The method of recording bad debts that results in a bad debt expense before the actual default is the ____________________.

 

ANS:  allowance method

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

2. According to the ____________________ principle, bad debt expense must be recorded in the period in which the sale was made.

 

ANS:  matching

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

3. The ____________________ order is necessary for the buyer to be obligated to accept and pay for the ordered goods.

 

ANS:  purchase

 

PTS:   1                    DIF:    Easy               OBJ:   5-7

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

4. The basis of accounting that recognizes revenue when it is realizable and earned is called the ____________________.

 

ANS:  accrual basis

 

PTS:   1                    DIF:    Easy               OBJ:   5-1

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

5. A(n) ____________________ categorizes the various accounts receivable amounts by the length of time outstanding.

 

ANS:

aging schedule

aging method

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

6. ____________________ are receivables that generally specify an interest rate and a maturity date at which any interest and principal must be repaid.

 

ANS:  Notes receivable

 

PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

7. The amount of money borrowed when a promissory note is issued is called the ____________________.

 

ANS:

principal

face amount

 

PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

8. A(n) ____________________ is the buyer of receivables, who acquires the right to collect the receivables and assumes the risk of uncollectibility.

 

ANS:  factor

 

PTS:   1                    DIF:    Easy               OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

9. Special forms of factoring are called ____________________.

 

ANS:  credit cards

 

PTS:   1                    DIF:    Easy               OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

10. Gross profit divided by net sales is called the ____________________ ratio.

 

ANS:  gross profit

 

PTS:   1                    DIF:    Easy               OBJ:   5-8

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

11. The difference between the principal amount of a note and its maturity value is called ____________________.

 

ANS:  interest

 

PTS:   1                    DIF:    Moderate       OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

12. To encourage prompt payment, sellers offer a(n) ____________________.

 

ANS:  sales discount

 

PTS:   1                    DIF:    Easy               OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

13. A sales invoice that bears the notation 2/10 means ____________________.

 

ANS:  2% discount applies within 10 days

 

PTS:   1                    DIF:    Moderate       OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

14. How efficiently a company is using the resources at its disposal is called ____________________.

 

ANS:  asset management

 

PTS:   1                    DIF:    Easy               OBJ:   5-8

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

15. Net sales is total sales less sales discounts and ________________.

 

ANS:

sales returns

sales returns and allowances

 

PTS:   1                    DIF:    Easy               OBJ:   5-1

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

MATCHING

 

Select the term that matches each of the following descriptions.

a.	Interest
b.	Maturity Value
c.	Principal
d.	Lender
e.	Factoring
f.	Fraction of year

 

 

g.	Maturity date
h.	Implicit
i.	Maker

 

 

1. The amount borrowed

 

2. The length of time a note is outstanding–the period of time between the date it is issued and the date the note is due to be paid

 

3. The party that receives payment due from a note

 

4. Date which the total interest and principal must be repaid

 

5. The difference between the principal amount of the note and its maturity value

 

6. The amount of cash the maker is to pay the payee on the maturity date of the note

 

1. ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

2. ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

3. ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

4. ANS:  G                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

5. ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

6. ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

Select the term that matches each of the following descriptions.

a.	Sales Discount
b.	Trade Discount
c.	Sales Allowance
d.	Sales Returns

 

 

7. Used to induce the customer to keep damaged goods

 

8. Used to encourage prompt payment

 

9. Reduction of price granted by the seller for a particular class of customers

 

7. ANS:  C                    PTS:   1                    DIF:    Moderate        REF:   CS5-1

OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

8. ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

9. ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

Match each statement to the item listed below

a.	Bank credit card	c.	Sears card
b.	Debit card	d.	American Express

 

 

10. Results in an immediate electronic withdrawal from the owner’s bank account when used.

 

11. Just a special form of factoring.

 

12. A non-bank credit card.

 

13. No service charge expense is incurred by the issuer when this card is used.

 

10. ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

11. ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

12. ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

13. ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

Match each statement to the item listed below

a.	Accounts receivable	e.	Notes receivable
b.	Aging method	f.	Realized
c.	Allowance for Doubtful Accounts	g.	Securitization
d.	Earned

 

 

14. The packaging of receivables as financial instruments or securities for sale to investors.

 

15. A way to estimate bad debts.

 

16. Money due the company from another business or individual.

 

17. Generally entitle the holder to interest.

 

18. A contra-asset account.

 

19. Indicates that non-cash resources have been exchanged for cash.

 

20. Indicates that the earnings process is substantially complete.

 

14. ANS:  G                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

15. ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

16. ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   5-3

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

17. ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

18. ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

19. ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   5-1

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

20. ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   5-1

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

Match each statement to the item listed below

a.	Bad debt expense	d.	Percentage of credit sales
b.	Net sales revenue	e.	Profitability ratios
c.	Nontrade receivables	f.	Trade receivables

 

 

21. Measure the return the company is earning on sales.

 

22. Money due from customers purchasing inventory in the ordinary course of business

 

23. Receivables that the company is not able to collect.

 

24. A way to estimate bad debt expense.

 

25. Arise from transactions not involving inventory (e.g., interest receivable).

 

26. The amount of sales expected to be collectible after deducting discounts and returns and allowances.

 

21. ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   5-8

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

22. ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   5-3

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

23. ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

24. ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

25. ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   5-3

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

26. ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

MULTIPLE CHOICE

 

1. Action Signs recorded credit sales of $10,000 on the gross method. Terms are 2/20, n/30. Select the correct statement about the entry to record this sale.

a.	Accounts receivable increases $10,000.
b.	Sales increase $9,800
c.	Sales discounts increase $200
d.	All of the above are correct

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   CS5-1

OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

2. A company receiving payment of a $20,000 accounts receivable within 10 days with terms of 2/10, n/30, would record a sales discount of:

a.	10% of  $20,000
b.	2% of $20,000
c.	(100% – 10%) x $20,000
d.	(100% – 2%) x $20,000

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   CS5-1

OBJ:   5-2

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

3. A company had sales of $40,000, sales discounts of $800, sales returns of $1,600 and commissions owed to sales people of $600. Compute net sales.

a.	$37,600
b.	$37,000
c.	$38,400
d.	$39,000

 

 

ANS:  A

$40,000 Sales – $800 Sales discounts – $1,600 Sales returns = $37,600 net sales.

 

 

PTS:   1                    DIF:    Moderate       REF:   CS5-1             OBJ:   5-2

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

4. The following information was presented in the balance sheet of Acworth Pools as of December 31, 2012:

 

Trade accounts receivable, net of allowance for doubtful
accounts of $200,000	$1,700,000

 

Select the incorrect statement from the following.

a.	The company expects to actually collect $1,700,000 of its receivables.
b.	The balance in the Accounts Receivable account in the company’s general ledger is $1,700,000.
c.	The net realizable value of the company’s receivables is $1,700,000.
d.	The company expects uncollectibles to total $200,000.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

5. What is the distinguishing characteristic between accounts receivable and notes receivable?

a.	Accounts receivable are usually current assets while notes receivable are usually long-term assets.
b.	Accounts receivable require payment of interest while notes receivable does not have payment of interest.
c.	Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies.
d.	Notes receivable generally specify an interest rate and a maturity date at which any interest and principle must be repaid.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   5-3 | 5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

6. On December 15, 2012, the accounts receivable balance was $50,000 and the balance in the allowance for doubtful accounts was $5,000. That morning, a $1,000 uncollected account was written-off. The net realizable value of accounts receivable immediately after the write-off is:

a.	$49,000
b.	$46,000
c.	$45,000
d.	$44,000

 

 

ANS:  C

$50,000 – $1000 = $49,000 A/R balance

$5,000 – $1,000 =      4,000 Allowance account balance

$45,000 NRV

 

PTS:   1                    DIF:    Moderate       REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

7. Which one of the following is an accurate description of the Allowance for Doubtful Accounts?

a.	Contra Account
b.	Liability Account
c.	Revenue Account
d.	Expense Account

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

8. If a company uses the direct write-off method of accounting for bad debts,

a.	It establishes an estimate for the allowance for doubtful accounts.
b.	It will record bad debt expense only when an account is determined to be uncollected.
c.	It will reduce the accounts receivable account at the end of the accounting period for estimated uncollected accounts.
d.	When an account is written off, total assets will stay the same.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

9. A company uses the direct write-off method to account for bad debts. What are the effects on the accounting equation of the entry to record the write-off of a customer’s account balance?

a.	Assets and liabilities decrease
b.	Assets and Stockholders’ equity decrease
c.	Stockholders’ equity and liabilities decrease
d.	Assets increase and Stockholders’ equity decrease

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

10. All of the following are true for a company that uses the allowance method of accounting for bad debts, EXCEPT:

a.	It uses a contra-asset account called the allowance for doubtful accounts.
b.	It records bad debt expense each time an account is determined to be uncollectible.
c.	It reduces its accounts receivable balance when the account is written off.
d.	It reports accounts receivable in the balance sheet at their net realizable value.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

11. Which one of the following statements is true if a company’s collection period for accounts receivable is unacceptably long?

a.	The collection cost would be reduced.
b.	The company may offer sales discounts to shorten the collection period.
c.	Cash flows from operations may be higher than expected for the company’s sales.
d.	The company should expand operations with its excess cash.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-2

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

12. If a company uses the allowance method to account for doubtful accounts, when will the company’s Stockholders’ equity decrease?

a.	At the date a customer’s account is written off
b.	At the end of the accounting period when an adjusting entry for bad debts is recorded
c.	At the date a customer’s account is determined to be uncollected
d.	When the accounts receivable amount becomes past due

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

13. Which allowance method approach is considered to be an income statement approach to estimating bad debts?

a.	The percentage of accounts receivable approach
b.	The percentage of accounts written off approach
c.	The percentage of net credit sales approach
d.	The direct write off method

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

14. Which one of the approaches for the allowance procedure emphasizes the net realizable value of accounts receivable on the balance sheet?

a.	The aging of accounts receivable method
b.	The percentage of net credit sales method
c.	The percentage of accounts written off method
d.	The direct write-off method

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

15. A company’s accounts receivable balance after posting net collections from customers for 2012 is $150,000. Management feels that uncollected accounts should be based on the following aging of accounts receivable and uncollected percentages. There are $100,000 that are 1-30 past due at 2% and $50,000 that are 31 to 60 days past due at 10%. The net realizable value of the accounts receivable is

a.	$147,500
b.	$148,000
c.	$150,000
d.	$143,000

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   CS5-3

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

16. All Star Auto has an accounts receivable balance after posting net collections from customers for 2012 of $180,000. The customers took advantage of sales discounts of $15,000. Management aged the accounts receivable and estimate for uncollected account percentages as follows:

 

$90,000	Current at 2%
$50,000	1-30 days past due at 5%
$30,000	31-60 days past due at 10%
$10,000	60+ days past due at 25%

 

The net realizable value of the accounts receivable is

a.	$173,200
b.	$170,200
c.	$172,700
d.	$180,000

 

 

ANS:  B

$180,000 (Accounts Receivable Balance) – [($90,000 ´ .02) + ($50,000 ´ .05) + ($30,000 ´ .10) + ($10,000 ´ .25)] = $9,800 (Allowance for Uncollectibles) = $170,200

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

17. Beginning accounts receivable were $200,000 and ending accounts receivable were $300,000. Assuming cash collections totaled $1,100,000, what were credit sales?

a.	$1,200,000
b.	$1,100,000
c.	$1,300,000
d.	$1,500,000

 

 

ANS:  A

$300,000 (Ending balance) + $1,100,000 (Cash collected) = $1,400,000 – $200,000 (Beginning Balance) = $1,200,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

18. Alco Roofing Company’s beginning accounts receivable were $200,000 and ending accounts receivable were $270,000. During the period, credit sales totaled $570,000, How much cash was collected from customers?

a.	$470,000
b.	$500,000
c.	$570,000
d.	$640,000

 

 

ANS:  B

$200,000 (Beginning Balance) + $570,000 (Sales on Account) – $270,000 (Ending balance) = $500,000

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

19. A company had beginning accounts receivable of $175,000. All sales were on account and totaled $550,000. Cash collected from customers totaled $650,000. Calculate the ending accounts receivable balance.

a.	$725,000
b.	$275,000
c.	$  75,000
d.	$175,000

 

 

ANS:  C

$175,000 (Beginning Accounts Receivable) + $550,000 (Net Credit Sales) – $650,000 (Cash Collected) = $75,000

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

AT&U Company

Data for the year ended December 31, 2012, are presented below:

 

Sales (credit)	$2,500,000
Sales returns and allowances	50,000
Accounts Receivable (December 31, 2012)	640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)	20,000
Estimated amount of uncollected accounts based on aging analysis	45,000

 

20. Refer to AT&U Company. If the company estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt expense for 2012?

a.	$44,500
b.	$25,000
c.	$24,500
d.	$4,500

 

 

ANS:  C

[$2,500,000 (Sales) – $50,000 (Sales Returns) = $2,450,000] ´ (1%) = $24,500

 

PTS:   1                    DIF:    Easy               REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

21. Refer to AT&U Company. If the company estimates its bad debt to be 2% of net credit sales, what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?

a.	$20,000
b.	$19,000
c.	$49,000
d.	$69,000

 

 

ANS:  D

$20,000 (Allowance for Doubtful Accounts balance before adjustment) + $49,000 (Adjustment) = $69,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

22. Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for 2012?

a.	$25,000
b.	$45,000
c.	$20,000
d.	$49,000

 

 

ANS:  A

$45,000 (Amount Required) – $20,000 (Current Credit Balance) = $25,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

23. Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?

a.	$640,000
b.	$595,000
c.	$620,000
d.	$615,000

 

 

ANS:  B

$640,000 (Accounts Receivable Balance) – $45,000 (Allowance for Doubtful Accounts) = $595,000

 

PTS:   1                    DIF:    Challenging    REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

24. Allatoona Landing reported net credit sales of $1,250,000 and cost of goods sold of $900,000 for 2012. Its beginning balance of Accounts Receivable was $175,000. The accounts receivable balance decreased by $25,000 during 2012. Rounded to two decimal places, what is the company’s accounts receivable turnover rate for 2012?

a.	7.14
b.	7.69
c.	8.33
d.	11.03

 

 

ANS:  B

$1,250,000 (Net Credit Sales) / [$175,000 (Beginning Accounts Receivable Balance) + $150,000 (Ending Accounts Receivable Balance) / 2] = 7.69

 

PTS:   1                    DIF:    Challenging    REF:   CS5-5             OBJ:   5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

25. The Allowance for Doubtful Accounts represents:

a.	Bad debt losses incurred in the current period
b.	The amount of uncollected accounts written off to date
c.	The difference between total sales made on credit and the amount collected from those credit sales
d.	The difference between the recorded value of accounts receivable and the net realizable value of accounts receivable

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

26. Which of the following statements is true regarding the two allowance procedures used to estimate bad debts?

a.	The percentage of net credit sales method takes into account the existing balance in the Allowance for Doubtful Accounts account.
b.	The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account.
c.	The aging of accounts receivable method takes into account the existing balance in the Allowance for Doubtful Accounts account.
d.	The direct write-off method does a better job of matching revenues and expenses.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   5-1

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

A2Z Events

The following data are from the company’s records for 2012:

 

Credit sales during the year	$2,400,000
Accounts Receivable–December 31, 2012	410,000
Allowance for Doubtful Accounts–December 31, 2012	55,000
Bad debt expense for the year	70,000

 

27. Refer to A2Z Events. What amount will the company show on its year-end balance sheet for the net realizable value of its accounts receivable?

a.	$410,000
b.	$285,000
c.	$340,000
d.	$355,000

 

 

ANS:  D

$410,000 (Accounts Receivable) – $55,000 (Allowance for Doubtful Accounts) = $355,000

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

28. Refer to A2Z Events. What are the effects on the accounting equation when the company makes the adjustment to record bad debt expense using the allowance method?

a.	Assets increase and liabilities decrease
b.	Assets and stockholders’ equity decrease
c.	Assets increase and stockholders’ equity decreases
d.	Assets decrease and stockholders’ equity increases

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   CS5-2

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

29. Refer to A2Z Events. What are the effects on the accounting equation when the company writes off a bad debt under the allowance method?

a.	Assets decrease and stockholders’ equity increase
b.	Assets and stockholders’ equity decrease
c.	Assets increase and stockholders’ equity decreases
d.	No effect on overall assets or stockholders’ equity

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Accelerated Solutions

The following data are from the company’s records for 2012:

 

Accounts receivable–January 1, 2012	$   350,000
Credit sales during 2012	1,200,000
Collections from credit customers during 2012	850,000
Customer accounts written off as uncollected during 2012	10,000
Allowance for doubtful accounts–January 1, 2012	35,000
Estimated uncollected accounts based on an aging analysis	50,000

 

30. Refer to Accelerated Solutions. What is the balance of Accounts Receivable at December 31, 2012?

a.	$700,000
b.	$340,000
c.	$690,000
d.	$710,000

 

 

ANS:  C

$350,000 (Accounts Receivable–Jan. 1) + $1,200,000 (Credit Sales) – $850,000 (Collections) – $10,000 (Accounts written off) = $690,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

31. Refer to Accelerated Solutions. If the aging method is used to estimate bad debts, what amount should be recorded as bad debt expense for 2012?

a.	$50,000
b.	$  5,000
c.	$15,000
d.	$25,000

 

 

ANS:  D

$50,000 (Estimated uncollected Accounts) – [$35,000 (Allowance for Doubtful Accounts–Jan. 1.) – $10,000 (Accounts written off during the year)] = $25,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

32. Refer to Accelerated Solutions. If the aging approach is used to estimate bad debts, find the balance in the Allowance for Doubtful Accounts after the bad debt expense adjustment.

a.	$  5,000
b.	$15,000
c.	$25,000
d.	$50,000

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        REF:   CS5-3

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

A-One Construction

The following data are from the company’s records for 2012:

 

Accounts Receivable–January 1, 2012	$455,000
Credit sales during 2012	900,000
Collections from credit customers during 2012	825,000
Customer accounts written off as uncollected during 2012	15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts)	2,100
Estimated uncollected accounts based on an aging analysis	29,200

 

 

 

33. Refer to A-One Construction. What is the balance of Accounts Receivable at December 31, 2012?

a.	$545,000
b.	$440,000
c.	$515,000
d.	$530,000

 

 

ANS:  C

$455,000 (Accounts Receivable–Jan. 1) + $900,000 (Credit Sales) – $825,000 (Cash Collections) – $15,000 (Accounts written off) = $515,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

34. Refer to A-One Construction. If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2012?

a.	$  2,100
b.	$27,100
c.	$29,200
d.	$31,300

 

 

ANS:  B

$29,200 (Estimated uncollected accounts) – $2,100 (Allowance balance after write offs) = $27,100

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

35. Refer to A-One Construction. If the aging approach is used to estimate bad debts, what should the balance in the Allowance for Doubtful Accounts be after the bad debts adjustment?

a.	$  2,100
b.	$31,100
c.	$29,200
d.	$27,100

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        REF:   CS5-3

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

A&B Foods

Data for the year ended December 31, 2012, are presented below.

 

Sales (100% on credit)	$2,100,000
Sales returns	150,000
Accounts Receivable (December 31, 2012)	420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)	25,000
Estimated amount of uncollected accounts based on an aging analysis	75,000

 

 

36. Refer to A&B Foods. If the company estimates its bad debts at 4% of net credit sales, what amount will be reported as bad debt expense for 2012?

a.	$50,000
b.	$75,000
c.	$78,000
d.	$84,000

 

 

ANS:  C

[$2,100,000 (Sales) – $150,000 (Sales Returns)] ´ .04 or 4% = $78,000

 

PTS:   1                    DIF:    Easy               REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

37. Refer to A&B Foods. If the company uses 4% of net credit sales to estimate its bad debts, what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?

a.	$  50,000
b.	$103,000
c.	$  78,000
d.	$  75,000

 

 

ANS:  B

$25,000 (Allowance for Doubtful Accounts at Dec. 31) + [$2,100,000 (Sales) – $150,000 (Sales Returns) ´ .04 or 4%] = $103,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

38. Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad debts, what amount will be reported as bad debt expense for 2012?

a.	$50,000
b.	$75,000
c.	$78,000
d.	$53,000

 

 

ANS:  A

$75,000 (Estimated amount of uncollected accounts) – $25,000 (Allowance prior to adjustment) = $50,000

 

PTS:   1                    DIF:    Challenging    REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

39. Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?

a.	$343,000
b.	$345,000
c.	$420,000
d.	$395,000

 

 

ANS:  B

$420,000 (Accounts Receivable at Dec. 31) – $75,000 (Allowance) = $345,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-2 | CS5-3

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

Ace Computing Company

On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were $500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.

 

 

40. Refer to the Ace Computing Company. The entry to recognize the write-off of the specific uncollected accounts will act to:

a.	Increase total assets and stockholders’ equity
b.	Increase total assets and decrease stockholders’ equity
c.	Decrease total assets and stockholders’ equity
d.	Not affect total assets or stockholders’ equity

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

41. Refer to the Ace Computing Company. The amount of bad debts expense recognized in the 2012 income statement will be:

a.	$1,652
b.	$   652
c.	$   142
d.	$1,450

 

 

ANS:  B

Year end Accounts Receivable Balance Beg Bal $40,000 + Net Credit Sales $80,000 – accts. written off $500 – collections $78,200 = $41,300

Year end Allowance Balance = $1,000

$41,300 ´ .04 or 4% = $1,652

$1,652 – $1,000 = $652

 

PTS:   1                    DIF:    Challenging    REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

42. Refer to the Ace Computing Company. The entry required to recognize the bad debts expense for 2012 will act to:

a.	Increase total assets and retained earnings
b.	Decrease total assets and retained earnings
c.	Decrease total assets and increase net income
d.	Increase total assets and decrease net income

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   CS5-3

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

43. Refer to the Ace Computing Company. The net realizable value of receivables appearing on the 2012 balance sheet will amount to:

a.	$40,648
b.	$39,648
c.	$41,300
d.	$39,800

 

 

ANS:  B

$41,300 (Accounts Receivable) – $1,652 (Allowance) = $39,648

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

44. On December 1, 2012, Anson’s Drug Store concluded that a customer’s $325 account receivable was uncollected and that the account should be written off. What effect will this write-off have on the company’s 2012 net income and balance sheet totals assuming the direct write-off method is used to account for bad debts?

a.	Decrease in net income; decrease in total assets
b.	Increase in net income; no effect on total assets
c.	No effect on net income; decrease in total assets
d.	No effect on net income; no effect on total assets

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   CS5-3

OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

45. During 2012, the accounts receivable turnover rate for Adaptive Equipment increased from 10 to 15 times per year. Which one of the following statements is the most likely explanation for the change?

a.	The company’s credit department has followed up with customers whose account balances are past due in order to generate quicker collections.
b.	The company has decreased sales to its most credit worthy customers.
c.	The company has increased the amount of time customers have to pay their accounts before they are past due.
d.	The company has extended credit to more risky customers in order to increase sales.

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    REF:   CS5-5

OBJ:   5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

46. Allgood Pet Supplies reported net credit sales of $3,200,000 and cost of goods sold of $2,600,000 for 2012. On January 1, 2012, accounts receivable was $450,000. Amounts owed by customers increased by $50,000 during 2012. Rounding to two decimal places, what is the company’s accounts receivable turnover rate for 2012?

a.	5.47
b.	6.40
c.	6.74
d.	7.11

 

 

ANS:  C

$3,200,000 (Sales) / [[$450,000 (Jan. 1 Balance) + $500,000 (Dec. 31 Balance)] / 2] = 6.74

 

PTS:   1                    DIF:    Moderate       REF:   CS5-5             OBJ:   5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

47. The principal amount of a note receivable plus the interest due is referred to as the note’s

a.	face valve.
b.	promissory value.
c.	expected value.
d.	maturity value.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

48. How will the lender of the promissory note record the note on its books?

a.	The promissory note will be recorded as an asset
b.	The promissory note will be recorded as a contra asset
c.	The promissory note will be recorded as revenue
d.	The promissory note will be recorded as an expense

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   CS5-4

OBJ:   5-6

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

49. A company needs to record 6 months of accrued interest on a 4-year, 12%, $12,000 promissory note payable. How much interest expense should be accrued?

a.	$2,160
b.	$1,440
c.	$1,080
d.	$720

 

 

ANS:  D

$12,000 (Principal) ´ .12 (Interest Rate) ´ 1 (Time Period) = $1,440 x 6/12 = $720

 

PTS:   1                    DIF:    Easy               REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Academy Grill Supply

On October 1, 2012, the company received a $50,000 promissory note from a customer. The annual interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September 30, 2013.

 

50. Refer to Academy Grill Supply. If the company’s year ends September 31, 2013, an adjusting entry is needed to:

a.	Increase interest revenue by $2,250
b.	Increase notes receivable by $750
c.	Increase interest receivable by $750
d.	Increase notes receivable by $2,250

 

 

ANS:  C

$50,000 (Principal) ´ .06 or 6% (Rate) ´ 3/12 (Time Period) = $750

 

PTS:   1                    DIF:    Moderate       REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

51. Refer to Academy Grill Supply. The effect on the company’s financial statements on September 30, 2013, is as follows:

a.	Assets and Stockholders’ equity increase
b.	Assets and Stockholders’ equity decrease
c.	Assets and liabilities increase
d.	No net change in assets

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        REF:   CS5-4

OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Absolute Appliances

The company sold merchandise to a customer on December 1, 2012, for $120,000.  The company accepted a promissory note as payment. The note has a term of three months and an annual interest rate of 10%. The company’s accounting period ends on December 31.

 

52. Refer to Absolute Appliances. What is the maturity date of the note?

a.	December 31, 2012
b.	January 31, 2013
c.	February 28, 2013
d.	March 1, 2013

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

53. Refer to Absolute Appliances. What amount should the company recognize as interest revenue on December 31, 2012?

a.	$      -0-
b.	$  1,000
c.	$12,000
d.	$11,000

 

 

ANS:  B

$120,000 (Principal) ´ .10 or 10% (Rate) ´ 1/12 (Time Period) = $1,000

 

PTS:   1                    DIF:    Moderate       OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

54. Refer to Absolute Appliances. What amount should the company recognize as interest revenue on the maturity date of the note?

a.	$    -0-
b.	$1,000
c.	$2,000
d.	$3,000

 

 

ANS:  C

$120,000 (Principal) ´ .10 or 10% (Rate) ´ 2/12 (Time Period) = $2,000

 

PTS:   1                    DIF:    Moderate       OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

55. The College Store accepts MasterCard for payments of purchases made by students. The credit card drafts are deposited directly in a bank account. MasterCard charges a 1.55% collection fee. Credit card drafts totaling $10,000 are deposited during August. Recording the sales and deposits will result in an increase in

a.	Cash for $10,000
b.	Sales for $ 9,854
c.	Accounts Receivable for $9,854
d.	Service Charge Expense for $155

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Accent Flooring

The company received a promissory note from a customer on March 1, 2012. The principal amount of the note is $20,000; the terms are 3 months and 9% annual interest.

 

56. Refer to the information for Accent Flooring. What is the total amount of interest the company will receive when the note is collected?

a.	$   300
b.	$   150
c.	$   450
d.	$1,800

 

 

ANS:  C

$20,000 (Principal) ´ .09 or 9% (Rate) ´ 3/12 (fraction of year) = $450

 

PTS:   1                    DIF:    Easy               REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

57. Refer to the information for Accent Flooring. At the maturity date, the customer pays the amount due for the note and interest. What entry is required on the books of Accent Flooring on the maturity date assuming that none of the interest had already been recognized?

a.	Increase Cash and decrease Notes Receivable by $20,000
b.	Increase Cash by $20,450, increase Interest Revenue by $450, and decrease Notes Receivable by $20,000
c.	Increase Cash by $20,450, increase Notes Receivable by $20,000, and increase Interest Revenue by $450
d.	No entry is required; the customer pays the amount due to Accent Flooring.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        REF:   CS5-4

OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Abbot Safe & Lock

The following information was obtained from the company’s records for 2012:

 

Credit sales during the year	$3,200,000
Accounts receivable–December 31, 2012	325,000
Allowance for doubtful accounts–December 31, 2012	35,000
Bad debt expense for the year	20,000

 

58. Refer to Abbot Safe & Lock. What amount will the company show on its year-end balance sheet for the net realizable value of its accounts receivable?

a.	$305,000
b.	$290,000
c.	$270,000
d.	$325,000

 

 

ANS:  B

$325,000 (Accounts Receivable) – $35,000 (Allowance) = $290,000

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

59. Refer to Abbot Safe & Lock. What is the effect on liquidity when the company records its estimate for bad debt expense using the allowance method?

a.	Liquidity decreases
b.	Liquidity increases
c.	Liquidity stays the same
d.	Liquidity both increases and decreases

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

A Better Mousetrap

The company sold merchandise to a customer on December 1, 2012, for $100,000. The customer paid with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company’s accounting period ends on December 31.

 

60. Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on December 31, 2012?

a.	$    -0-
b.	$   750
c.	$1,500
d.	$9,000

 

 

ANS:  B

$100,000 (Principal) ´ .09 or 9% (Rate) ´ 1/12 (Time Period) = $750

 

PTS:   1                    DIF:    Moderate       REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

61. Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on the maturity date of the note?

a.	$    -0-
b.	$4,500
c.	$3,750
d.	$9,000

 

 

ANS:  C

$100,000 (Principal) ´ .09 or 9% (Rate) ´ 5/12 (Time Period) = $3,750

 

PTS:   1                    DIF:    Moderate       REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Art Shoes

This company received a promissory note from a customer on July 1, 2012. The face amount of the note is $45,000; the terms are 12 months and 10% annual interest.

 

62. Refer to Art Shoes. How much interest revenue will the company recognize for the year ended December 31, 2012?

a.	$       0
b.	$9,000
c.	$2,250
d.	$4,500

 

 

ANS:  C

$45,000 (Principal) ´ .10 or 10% (Rate) ´ 6/12 (Time Period) = $2,250

 

PTS:   1                    DIF:    Moderate       REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

63. Refer to Art Shoes. At the maturity date, the customer pays for the note and interest. The company made the proper adjustment at the end of December for interest. The effect of recognizing the transaction on the maturity date is

a.	A decrease to Cash
b.	An increase to Notes Receivable
c.	An increase to Discount on Notes Receivable
d.	A decrease to Notes Receivable

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

64. Advanced Packaging accepted a credit card account receivable in exchange for $25,000 of services provided to a customer. The credit card company charges a 4% service charge. Recording the transaction in the company’s accounting records will have what effect on the accounting equation?

a.	Increase assets and stockholders’ equity by $24,000
b.	Decrease assets and stockholders’ equity by $1,000
c.	Increase assets by $25,000
d.	Increase stockholders’ equity by $25,000

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

65. What should a company do to improve its accounts receivable turnover rate?

a.	Lower its selling prices.
b.	Increase its sales force.
c.	Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
d.	Reduce the number of employees working in the credit department.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   5-2 | 5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

66. On January 2, Alfredo Corporation sold merchandise with a gross price of $100,000 to a customer with terms of 2/10, n/30. How much Sales Discounts would be recorded if payment was received from the customer on January 8? Assume the company uses the Gross Method of recording receivables.

a.	$0
b.	$2,000
c.	$98,000
d.	$100.000

 

 

ANS:  B

Accounts receivable $100,000 ´ .02 = $2,000

 

PTS:   1                    DIF:    Moderate       REF:   CS5-1             OBJ:   5-2

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

67. All of the following are criteria that the SEC requires to be met before revenue is considered realized (or realizable) and earned EXCEPT:

a.	Delivery has occurred or services have been provided.
b.	The seller’s price to the buyer is fixed and determinable.
c.	Collection is possible.
d.	Persuasive evidence of an arrangement exists.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   5-1

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

68. Internal control for sales involve which of the following documentation?

a.	A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all presented.
b.	A sale and its associated receivable are recorded only when the billing documents are prepared.
c.	A sale and its associated receivable are recorded only when the goods are ordered.
d.	A sale and its associated receivable are recorded only when the good are produced.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   5-7

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

69. Which of the following would be correct if a company factored $2,500,000 of receivables with a 2 percent fee?

a.	$2,450,000 credit to cash
b.	$50,000 debit to factoring fee expense
c.	$2,500,000 debit to accounts receivable.
d.	$50,000 debit to factoring fee receivable.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   5-5

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

70. The following information is available for All Care Nursing Supply for fiscal year ending December 31, 2012. Calculate the Accounts Receivable Turnover Ratio:

 

Net Sales	$450,000	Accounts Receivable, December 31, 2011	$175,000
Operating Income	$120,000	Accounts Receivable, December 31, 2012	$125,000
Net Income	$100,000

 

a.	3
b.	.8
c.	3.6
d.	2.57

 

 

ANS:  A

Net Sales $450,000 divided by average accounts receivable $150,000 (($175,000 + $125,000) / 2) = 3 accounts receivable turnover ratio.

 

PTS:   1                    DIF:    Moderate       REF:   CS5-5             OBJ:   5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

PROBLEM

 

1. Advanced Technology reported the following on its balance sheet at December 31, 2012:

 

Accounts receivable, less Allowance for Doubtful Accounts of $20,500

$580,200

 

A)	What is the net realizable value of the company’s accounts receivable?
B)	What is the balance of the accounts receivable account?
C)	Are you able to determine whether the company uses the allowance method or the direct write off method for bad debts? Why or why not?

 

 

ANS:

A)	$580,200
B)	$580,200 + $20,500 = $600,700
C)	The company uses the allowance method. This is seen by the presentation on the balance sheet of the receivables that shows a deduction from the gross amount of receivables. Only a company that uses the allowance method would show a deduction from receivables for doubtful accounts.

 

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Atlantis Tropicals

The following information was taken from the company’s records at the end of 2012.

 

Credit Sales	$1,000,000
Sales returns and allowances	80,000
Accounts Receivable–December 31, 2012	255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts)	23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012)	35,000

 

2. Refer to Atlantis Tropicals. If bad debts are estimated at 1% of net credit sales, how much will the company report as bad debts expense for 2012?

 

ANS:

$9,200

($1,000,000 – $80,000) ´ .01 or 1% = $9,200

 

PTS:   1                    DIF:    Easy               REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

3. Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how much bad debts expense will the company report for 2012?

 

ANS:

$35,000 – $23,000 = $12,000

 

PTS:   1                    DIF:    Easy               REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

4. Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how much is the net realizable value of the accounts receivable at December 31, 2012?

 

ANS:

$255,000 (Accounts Receivable) – $35,000 (Allowance for Doubtful Accounts) = $220,000

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

5. Refer to Atlantis Tropicals. Assume that the net realizable value is $210,000 after the adjustment for bad debts in 2012. How much is the net realizable value of accounts receivable after a customer’s account of $15,000 is written off? Explain why.

 

ANS:

$210,000

Accounts receivable and the allowance for doubtful accounts both decrease by the same amount, $15,000, leaving the net realizable value of the accounts receivable unaffected.

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

6. Refer to Atlantis Tropicals. Determine the effect on the company’s accounting equation of the year-end adjustment of bad debts using the aging approach.

 

Assets	= Liabilities	+ Stockholders’ Equity

 

 

ANS:

 

Assets	= Liabilities	+ Stockholders’ Equity
Allow. For Doubtful Accounts (12,000)		Bad Debt Expense (12,000)

 

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

Aardvark Resale

This company sells merchandise only on credit. For the year ended December 31, 2012, the following data are available:

 

Sales	$1,200,000
Sales returns and allowances	50,000
Accounts Receivable–January 1, 2012	225,000
Allowance for doubtful accounts–January 1, 2012	15,000
Collections during 2012	1,050,000
Accounts written off as uncollected during 2012	10,000

 

7. Refer to Aardvark Resale. Determine the balance of Accounts Receivable at December 31, 2012.

 

ANS:

$315,000

$225,000 (Accounts Receivable at Jan. 1) + $1,200,000 (Sales) – $50,000 (Sales returns & allowances) – $1,050,000 (Collections) – $10,000 (Accounts written off) = $315,000

 

PTS:   1                    DIF:    Challenging    REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

8. Refer to Aardvark Resale. Assume that the company estimates bad debts at 2% of net credit sales.

 

A)	What amount will the company record as bad debts expense for 2012?
B)	How much is the net realizable value of accounts receivable reported on the company’s balance sheet at December 31, 2012?

 

 

ANS:

A)	($1,200,000 – $50,000) ´ .02 = $23,000
B)	$315,000 (Accounts Receivable at Dec. 31) – [$15,000 – $10,000 + $23,000] (Allowance for Doubtful Accounts after write-off and year-end adjustment) = $287,000

 

 

PTS:   1                    DIF:    Easy               REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

9. Refer to Aardvark Resale. Assume that the company estimates bad debts based on the aging method, and the aging schedule indicates that $30,100 of the year-end accounts receivable will be uncollected.

 

A)	What amount will the company recognize as bad debts expense for the year?
B)	How much is the net realizable value of the receivables to be reported on the company’s balance sheet at year-end?

 

 

ANS:

A)	$30,100 – ($15,000 – $10,000) = $25,100
B)	($315,000 – $30,100) = $284,900

 

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

10. Refer to Aardvark Resale. Since the company has a choice of acceptable methods to estimate bad debts, what factors should be considered in the selection?

 

ANS:

The percentage of net credit sales method emphasizes the matching principle. The aging method emphasizes the valuation of the receivables at the net amount to be collected. The company would be concerned with both income measurement and balance sheet valuation, but must choose one of the two approaches, most likely based on management philosophy. If most customer balances fall within a small range of variation, the percentage of net credit sales method, which is easier to apply, will probably give reasonable results for both income measurement and asset valuation. However, if there is a wide variation in the amounts of customer balances, and especially if some large customer balances are significantly past due and their collection is uncertain, then the aging method should give better results for both income measurement and asset valuation.

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

11. Refer to Aardvark Resale. Can the company use the direct write-off method rather than the allowance method to account for bad debts expense? Explain why or why not.

 

ANS:

The direct write-off method is not an acceptable GAAP (generally accepted accounting principles) procedure to account for bad debts. It does not adequately match bad debt expense with the revenues unless the accounts are determined to be uncollected in the same year that the revenue was recognized. In rare cases, when a company has very infrequent and immaterial amounts of bad debts, the direct write-off method can be justified. It does not appear that the company’s situation meets these conditions for use of the direct write-off method.

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Abundant Returns

This company sells its merchandise only on credit. The following data are available at December 31, 2012.

 

Sales	$411,000
Sales returns and allowances	12,000
Accounts receivable at January 1, 2012	89,000
Allowance for doubtful accounts at January 1, 2012	4,100
Cash collections during 2012	385,100
Accounts written off as uncollected during 2012	3,600

 

 

 

 

12. Refer to Abundant Returns. Determine the balance of Accounts Receivable at December 31, 2012.

 

ANS:

$99,300

$89,000 (Account Receivable–Jan. 1) + $411,000 (Sales) – $12,000 (Sales Returns and Allowances) – $385,100 (Cash Collections) – $3,600 (Accounts Written Off) = $99,300

 

PTS:   1                    DIF:    Challenging    REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

13. Refer to Abundant Returns. The firm estimates that bad debts could be 2% of net sales.

 

A)	What amount will the company recognize as bad debts expense for the year?
B)	Assume that the company has a balance of Accounts Receivable of $108,900, and an Allowance for Doubtful Accounts of $820. What will be the net realizable value once the adjustment from (Part A) is made?

 

 

ANS:

A)	$411,000 – $12,000 = $399,000 (Net Sales) ´ .02 or 2% = $7,980
B)	$108,900 (Accounts Receivables Balance) – ($820 + $7,980) = $100,100

 

 

PTS:   1                    DIF:    Easy               REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

14. Refer to Abundant Returns. Assume that the company estimates bad debts using the aging method. The aging schedule indicates that $11,500 of the end of the year Accounts Receivable will be uncollected.

 

A)	What amount will the company recognize as bad debt expense for the year?
B)	If the ending balance of Accounts Receivables is $65,200, what is the net realizable value of Accounts Receivable reported on December 31, 2012?

 

 

ANS:

A)	$11,500 – ($4,100 – $3,600) = $11,000
B)	$65,200 (Accounts Receivable) – $11,500 (Allowance) = $53,700

 

 

PTS:   1                    DIF:    Moderate       REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

15. On November 1, 2012, Aero Graphics sold merchandise to a customer and received a 10%, 90-day promissory note with a principal amount of $60,000.

 

A)	Identify the maturity date of the note.
B)	How much total interest revenue will the company earn over the term of the note?
C)	By how much will net income be understated if the company fails to make a year-end adjusting entry for the note?

 

 

ANS:

A)	90 – 29 days (Nov.) – 31 days (Dec.) = 30. Therefore, the due date is January 30, 2013.
B)	$60,000 ´ 10% ´ 90/365 = $1,479.45
C)	Net income will be understated by $986.30 ($1,479.45 ´ 60/90)

 

 

PTS:   1                    DIF:    Challenging    REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

Accutemp Heating & Air

On May 1, 2012, the company sold merchandise to a customer and received a 8%, 6-month note with a principal amount of $100,000. The company’s year end is December 31.

 

 

16. Refer to Accutemp Heating & Air. Identify the maturity date of the note.

 

ANS:

November 1, 2012

 

PTS:   1                    DIF:    Challenging    OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

17. Refer to Accutemp Heating & Air. How much total interest revenue will the company recognize over the term of the note?

 

ANS:

$4,000

$100,000 (Principal) ´ 8% (Interest Rate) ´ 6/12 (Time Period) = $4,000

 

PTS:   1                    DIF:    Easy               OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

18. Affinity Services Group received a 12%, 6-month promissory note with a principal amount of $10,000 from a customer for the sale of merchandise on December 1, 2012.

 

A)	How much interest revenue will the company recognize as of December 31, 2012?
B)	How much interest revenue will the company recognize in 2013?
C)	Determine the total amount of cash the company will collect on the date of the note’s maturity.

 

 

ANS:

A)	$10,000 ´ 12% ´ 1/12= $100
B)	$10,000 ´ 12% ´ 5/12= $500
C)	$10,000 + ($10,000 ´ 12% ´ 6/12) = $10,600

 

 

PTS:   1                    DIF:    Easy               REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

19. On June 3, 2012, Alpine Corporation sold merchandise with a gross price of $45,000 with terms of 2/10, n/30.

 

Prepare the journal entries to:

 

A)	Record the sale using the gross method.
B)	Assume the payment is received on June 10, 2012.
C)	Assume payment is not received until June 21, 2012.

 

 

ANS:

				Debit	Credit
A)	6/03	Accounts Receivable		45,000
			Sales Revenue		45,000
B)	6/10	Cash ($45,000 ´ 98%)		44,100
		Sales Discounts		900
			Accounts Receivable		45,000
C)	6/21	Cash		45,000
			Accounts Receivable		45,000

 

 

PTS:   1                    DIF:    Moderate       REF:   CS5-1             OBJ:   5-2

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

20. Alpha Company’s accounts receivable and allowance for doubtful accounts balances were $100,000 and $14,000 (credit) respectively, at the beginning of 2012. During 2012, a customer defaults on a $12,000 balance related to goods purchased during 2011. By the end of the year, the company had made credit sales of $2,400,000 and collected $2,200,000 on account.  It now estimates that 1 percent of its credit sales will default.

 

A)	Prepare the journal entry to record the write off the bad debt.
B)	Prepare the adjusting entry to record bad debt expense for 2012.
C)	What is the net accounts receivable balance at the end of the year?

 

 

ANS:

			Debit	Credit
A)	Allowance for Doubtful Accounts		12,000
		Accounts Receivable		12,000
B)	Bad Debt Expense		24,000
		Allowance for Doubtful Accounts		24,000
		($2,400,000 ´ 1% = $24,000)
C)	A/R ($100,000 + 2,400,000 – 2,200,000 – 12,000)		$288,000
	Less: Allow. for doubtful accts ($14,000 – 12,000 + 24,000)		26,000
		Net accounts receivable	$262,000

 

 

PTS:   1                    DIF:    Challenging    REF:   CS5-2             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

21. On January 1, 2012, Alliance Company had the following balances for accounts receivable and allowance for doubtful accounts:

 

Accounts receivable	$750,000 (debit)
Allowance for doubtful accounts		50,000 (credit)

 

During 2012 the company made $3,200,000 in credit sales, collected $3,000,000 of accounts receivable and wrote off $20,000 of accounts receivable as uncollected.

 

Required:

 

A)	What is the company’s preadjustment balance in accounts receivable on December 31, 2012?
B)	What is the preadjustment balance in allowance for doubtful accounts on December 31, 2012?
C)	Assume an analysis of aging of accounts receivable indicates that $45,000 of the current accounts receivable balance is uncollected. By what amount will the allowance for doubtful accounts need to be adjusted?
D)	Prepare the adjusting entry for 2012 for Allowance for Doubtful Accounts.

 

 

ANS:

A)	Beginning Accounts Receivable January 1, 2012				$   750,000
	Plus Sales during 2012				3,200,000
	Minus collections during 2012				-3,000,000
	Minus accounts written off during 2012				–     20,000
	Accounts Receivable December 31, 2012				$   930,000
B)	Beginning Allowance for doubtful accounts				$     50,000
	Minus accounts written off during 2012				–     20,000
	Preadjustment balance Allowance for doubtful accounts				$     30,000
C)	Preadjustment balance Allowance for doubtful accounts				$     30,000
	Balance in Allowance for doubtful accounts after adjustment				45,000
	Adjustment to Allowance for doubtful accounts				$     15,000
D)				Debit	Credit
	12/31	Bad Debt Expense		15,000
			Allowance for Doubtful Accounts		15,000

 

 

PTS:   1                    DIF:    Challenging    REF:   CS5-3             OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

22. All American Storage Corporation sold merchandise with credit terms of 2/10, n/30, for $100,000 to a customer on January 01, 2012.  Nine months later, on October 1, 2012 the company accepted a 12%, 6-month note receivable in settlement of the account. The customer paid the maturity value of the note on the due date.

 

Prepare the following journal entries:

 

A)	Record the sale of merchandise January 1, 2012.
B)	Record the receipt of the note receivable on October 1, 2012.
C)	Record the adjusting entry to accrue interest on December 31, 2012.
D)	What is the due date of the note?
E)	Record the collection of the note on the due date.

 

 

ANS:

				Debit	Credit
A)	Jan. 1, 2012	Accounts Receivable		100,000
			Sales Revenue		100,000
B)	Oct. 1, 2012	Notes Receivable		100,000
		Accounts Receivable			100,000
C)	Dec. 31, 2012	Interest Receivable		3,000
		Interest Income (100,000 x .12 x 6/12 x 1/2 )			3,000
D)	April 1, 2013
E)	April 1, 2013	Cash ($100,000 + 6,000 (interest))		106,000
			Notes Receivable		100,000
			Interest Receivable		3,000
		Interest Revenue			3,000

 

 

PTS:   1                    DIF:    Challenging    REF:   CS5-4             OBJ:   5-6

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

23. The following information is available for All-4-U Company for the year ending December 31, 2012:

 

Net Sales	$5,000,000	Accounts Receivable December 31, 2011	$1,250,000
Cost of goods sold	$3,500,000	Accounts Receivable December 31, 2012	$1,000,000
Operating Income	$600,000
Net Income	$400,000

 

A)	Compute the gross profit ratio for 2012.
B)	Compute the operating margin ratio for 2012.
C)	Compute the net profit margin ratio for 2012.
D)	Compute the accounts receivable turnover for 2012.

 

 

ANS:

A)
B)
C)
D)

 

 

PTS:   1                    DIF:    Moderate       REF:   CS5-5             OBJ:   5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

24. The following comparative financial statements for the years ended December 31, 2012 and 2011 are provided for Air Plus Company:

 

Balance Sheet:		2012	2011
	Cash and cash equivalents	$87,000	$71,600
	Accounts receivables, less allowance for doubtful
	accounts of $90 (2012) and $82 (2011)	3,800	2,500
	Notes receivable	15,000	20,000
Income Statement:
	Net sales for the year	$9,700	$8,800
	Net income for the year	920	1,050

 

Answer these questions concerning the company’s receivables:

 

A)	What is the gross amount of accounts receivable at December 31, 2012? Why is this amount different than the amount of receivables shown in the 2012 column of the balance sheet?
B)	What is the net realizable value of accounts receivable at December 31, 2012? What does this amount represent?
C)	How should accounts receivable be classified on a classified balance sheet? Why?

 

 

ANS:

A)	$3,800 + $90 = $3,890. It is different because, unlike the balance sheet presentation, it has not been adjusted for the estimated amount of receivables that are deemed uncollected.
B)	$3,800; This is the amount that the company expects to collect.
C)	Accounts receivable should be classified as a current asset since receivables are expected to be collected within a year’s time or less.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

25. The following information was taken from the records of Alphabet Soup at the end of 2012:

 

Cash sales	$1,000,000
Credit sales	500,000
Sales discounts	5,000
Accounts Receivable	250,000
Allowance for Doubtful Accounts (before adjustment)	(25,000)
Estimated uncollected accounts	2,475
Cost of goods sold	$975,000

 

Determine the following:

1. A) Gross sales
2. B) Net sales
3. C) Gross profit

 

Assuming the company uses the income statement approach to estimating uncollectibles:

1. D) Bad debt estimate percentage
2. E) Year-end adjusting entry to record bad debt expense
3. F) Ending balance in Allowance for Doubtful Accounts after adjustment
4. G) Net realizable value of receivables after adjustment for bad debts

 

Assuming the company uses the balance sheet approach to estimating uncollectibles:

1. H) Gross receivables
2. I) Ending balance in Allowance for Doubtful Accounts after adjustment
3. J) Net realizable value of receivables after adjustment for bad debts

 

ANS:

1. A) $1,000,000 + $500,000 = $1,500,000
2. B) $1,500,000 (gross sales) – $5,000 (sales discounts) = $1,495,000
3. C) $1,495,000 (net sales) – $975,000 (CGS) = $520,000
4. D) $2,475 (bad debt estimate) / $495,000 (net credit sales) = .005 (or 1/2 of one percent)
5. E) Bad debt expense 2,475

Allowance for Doubtful Accounts                  2,475

1. F) $25,000 (beg balance) + $2,475 (adjusting entry) = $27,475
2. G) $250,000 (A/R) – $27,475 (Allowance) = $222,525
3. H) $250,000
4. I) $2,475
5. J) $250,000 (A/R) – $2,475 = $247,525

 

PTS:   1                    DIF:    Easy               OBJ:   5-1 | 5-2 | 5-4

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

ESSAY

 

1. What are the criteria the SEC uses to determine if revenue is realized or realizable and earned?

 

ANS:

1.	Persuasive evidence of an arrangement exists.
2.	Delivery has occurred or services have been provided.
3.	The seller’s price to the buyer is fixed and determinable.
4.	Collection is reasonably assured.

 

 

PTS:   1                    DIF:    Easy               OBJ:   5-1

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

2. What is the purpose of an aging schedule for accounts receivable?

 

ANS:

An aging schedule categorizes the various account receivable amounts by age based on how long an account is past due or outstanding. A company uses this for estimating how much of its accounts receivable are expected to default. It is a refined approach because it lists the dollar amounts of receivables based on the period of time each has been outstanding, such as 30, 60, or more days outstanding.

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

3. Airport Support Company reported its accounts receivable turnover ratio at 10 times. Its credit terms are 2/10, n/20. What does this ratio tell you about this company?

 

ANS:

At an accounts receivable turnover of 10 times per year, the company’s receivables are outstanding approximately 36 days prior to collection (360/10 days). Given that credit terms are 2/10, n/20, one would expect customers to pay within 20 days. Customers should pay within ten days to obtain the discount of 2%. The company needs to make more efforts to collect its receivables given its current credit terms.

 

PTS:   1                    DIF:    Moderate       OBJ:   5-2 | 5-8

NAT:  AICPA FN-Measurement | AACSB Analytic | ACBSP-APC-12-Receivables Reporting

 

 

4. Identify two methods of accelerating cash from sales.

 

ANS:

Using credit cards often accelerates cash collections. The bank charges a fee but the company receives payment from the credit card company instead of waiting until the customer actually pays. A company is also able to accelerate cash by factoring receivables to the bank. This involves selling accounts receivable to the bank instead of waiting for the customer to actually pay.

 

PTS:   1                    DIF:    Easy               OBJ:   5-5

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

5. You Decide Essay

 

You are the credit manager at a large retail department store.  What steps should you take before deciding to write off a customer’s account?

 

ANS:

After giving customers a grace period, you might send them a series of past due notices. The tone of the notices would get increasingly urgent.  Eventually, you may decide to turn the account over to a collection agency.  If all these efforts fail, you would likely write off the account.

 

PTS:   1                    DIF:    Easy               OBJ:   5-4

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting

 

6. You Decide Essay

 

You are interning at a financial services firm and have been asked to evaluate the performance of two major department stores.  The following information (in millions) is available for Wal-Mart and Nordstrom for the most recent fiscal periods available:

Wal-Mart

Net Sales	$405,046	Beginning Accounts Receivable	$4,144
Gross Profit	100,389	Ending Accounts Receivable	3,905
Operating Income	23,950
Net Income	14,848

 

Nordstrom

Net Sales	$8,627	Beginning Accounts Receivable	$1,942
Gross Profit	3,299	Ending Accounts Receivable	2,035
Operating Income	834
Net Income	441

 

Compute the (1) gross profit margin, (2) operating margin, (3) net profit margin, and (4) accounts receivable turnover for the two companies and indicate which company’s performed better.

 

 

ANS:

 Wal-Mart                               Nordstrom

Gross profit margin	$100,389 / $405,046 = 24.78%	$3,299 / $8,627 = 38.24%
Operating margin	$23,950 / $405,046 =     5.91%	$834 / $8,627 = 9.67%
Net profit margin	$14,848 / $405,046 =     3.67%	$441 / $8,627 = 5.11%
Receivable turnover	405,046 / [($3,905 + $4,144) / 2] = 100.65	$8,627 / [$2,035 + $1,942) / 2] = 4.34

 

For the period in question, Nordstrom was more profitable than Wal-mart.

 

PTS:   1                    DIF:    Challenging    OBJ:   5-8

NAT:  AICPA FN-Reporting | AACSB Communication | ACBSP-APC-12-Receivables Reporting